About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

Spain One Step Closer to Pseudo Bailout?

Yesterday Michael Meister and Norbert Barthle, members of Angela Merkel’s Christian Democatic bloc, fired up the euro bulls when they hinted that they’re open to the idea of Spain asking for a full bailout. This contrasts with German Finance Minister Wolfgang Schauble’s statements about Spain not needing any more financial assistance.

But before you bet the farm on a Spanish bailout, you should know that market players aren’t expecting Spain to ask for a full bailout package anytime soon. They say that Spain will more likely ask for a precautionary credit line instead.

A precautionary whuuut?!

While a full bailout package will give Spain money outright to finance its debts, a precautionary credit line would mean that the country would be able to borrow money IF and WHEN they actually need it. It’s just like your regular banks, yo!

A precautionary credit line is more favorable to other euro zone nations as it would mean that they won’t have to shell out moolah outright. It’s also favorable to Spain as conditionality requirements (a.k.a. austerity measures!) for asking for a credit line aren’t as strict as a full bailout package would demand.

Judging by the euro’s price action yesterday, the investors are also in favor of Spain’s recent developments. Heck, the euro roundhouse kicked its major counterparts!

So, Spain appears to be one step closer towards receiving some financial help. Why does this matter to average Joes like you and me?

First, it could shift the entire market’s attention towards Spain. If Spain does request for a credit line, it would give the markets more confidence in the ESM and OMT programs.

Furthermore, an improvement in market sentiment could also help push down Spanish yields, with some analysts predicting that they could drop as much as 150 basis points. If yields were to drop by that much, financing new debt would be much easier for the Spanish government and the ECB may not even have to make use of the OMT program to purchase any bonds!

In effect, the mere request of a credit line could act as a pseudo bailout for Spain!

Now, before you start putting up any positions, consider how this could affect the euro.
On one hand, traders could begin to establish their positions, anticipating that Spain will eventually field a request for the credit line. If this happens, we could see the euro rally in the coming weeks.

On the other hand, if Spanish and other European leaders cannot agree on conditionality terms, traders may become impatient and yesterday’s move may just be a temporary blip on the charts.

What do you guys think? Will Spain request for a precautionary credit line before the year ends?